The Insolvency and Bankruptcy Code (IBC), 2016, is a major law passed by the Indian Parliament to improve how businesses, partnerships, and individuals handle financial troubles and insolvency. It became effective on December 1, 2016, and provides a clear, time-bound process to resolve insolvency issues. Among its many sections, Section 20 specifically focuses on how a struggling company (called a corporate debtor) is managed during the Corporate Insolvency Resolution Process (CIRP). This article explains Section 20 of the IBC in detail, using legal resources and interpretations to provide a clear and thorough understanding for everyone involved, such as lawyers, business owners, and researchers.
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Section 20 of Insolvency and Bankruptcy Code, 2016
Section 20 of the IBC is an important part of India’s legal system for dealing with corporate insolvency. Its main goal is to keep a struggling company running smoothly during the insolvency process so that its value is preserved for a possible recovery.
The person in charge is called the interim resolution professional (IRP), and has a key role. The IRP is responsible for protecting the company’s assets and keeping its operations active, as if the business were still healthy and functioning normally, known as a "going concern."
Detailed Provisions of Section 20 of IBC, 2016
Section 20 is divided into two parts, each explaining specific responsibilities and powers of the interim resolution professional (IRP):
Subsection (1): This part requires the IRP to do everything possible to protect the value of the company’s property and keep its business running as a going concern. This means the IRP must work to ensure the company stays operational, its assets are safe and its business relationships remain intact to increase the chances of finding a solution to the insolvency.
Subsection (2): To carry out the responsibilities in Subsection (1), the IRP is given several powers, which include:
Appointing Professionals: The IRP can hire experts like accountants or lawyers to help manage the company’s complex financial and legal issues.
Managing Contracts: The IRP can create, change or update contracts on behalf of the company, allowing flexibility to meet the needs of a business during the insolvency process.
Raising Interim Finance: The IRP can borrow money (called interim finance) to keep the business running, but there are rules. For example, they cannot use secured property (assets tied to a loan) as collateral without the permission of secured creditors, unless the property’s value is at least twice the amount of the debt. This ensures a balance between keeping the business afloat and protecting the rights of creditors.
Giving Instructions: The IRP can give directions to the company’s employees to ensure the business keeps operating as a going concern.
Taking Necessary Actions: The IRP has the authority to take any other steps needed to keep the company running, giving them flexibility to handle unexpected challenges.
Together, these powers help stabilize the company, maintain its position in the market, and improve the chances of successfully resolving the insolvency.
Find out What Insolvency is?
Judicial Interpretations on Section 20 of IBC, 2016
Judicial interpretations have helped to clarify how Section 20 is applied in real-world situations and provide guidance on its practical use. These caselaws show how courts balance the need to keep a business running with protecting the rights of creditors:
Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta and Ors. (2019): The Supreme Court emphasized that the corporate debtor must continue operating as a going concern during the CIRP, reinforcing the purpose of Section 20 to preserve business operations.
Sunil Kumar Jain and Ors. v. Sundaresh Bhatt and Ors. (2022): This case outlined that if the company cannot be kept as a going concern despite the IRP’s best efforts, it should not be assumed to still be a going concern during the CIRP. This highlights the difficulties of maintaining operations in tough situations.
Challenges that Section 20 of IBC Face
Section 20 aims to preserve the value of a company but there are some practical challenges, including:
Ensuring that the IRP has the skills and resources to manage complicated business operations.
Balancing the needs of secured creditors (who have claims on specific assets) and unsecured creditors (who don’t), especially when borrowing interim finance.
Handling cases where keeping the business as a going concern is not possible, as seen in the Sunil Kumar Jain case.
These challenges show the need for strong oversight and support, such as guidance from the Committee of Creditors and regulatory bodies like the Insolvency and Bankruptcy Board of India (IBBI).
Learn more about Corporate Insolvency Resolution
Summary
Section 20 of the IBC, 2016, is a critical rule that ensures a struggling company is managed as a going concern during the insolvency process. The interim resolution professional plays an important role in protecting the value of a company and helping find a resolution. Caselaws and real-world applications show its importance in balancing the interests of all parties, though challenges remain in putting it into practice. This article offered a clear understanding for anyone navigating India's insolvency system.
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Section 20 of IBC: FAQs
Q1. What is Section 20 of the Provincial Insolvency Act?
Section 20 of the Provincial Insolvency Act allows a court to appoint an interim receiver to manage a debtor’s property after an insolvency petition is accepted, following the rules of the Code of Civil Procedure, 1908.
Q2. What is Section 20 of the Insolvency Act?
The term "Insolvency Act" is not specific. In India’s Provincial Insolvency Act, 1920, Section 20 refers to appointing an interim receiver. For other laws (e.g., the UK’s Insolvency Act), please specify the country or context.
Q3. What is Section 20(1) of the IBC?
Section 20(1) of the Insolvency and Bankruptcy Code, 2016, requires the interim resolution professional to manage the corporate debtor’s operations as a going concern.
Q4. What is Section 21 of the IBC?
Section 21 of the Insolvency and Bankruptcy Code, 2016, requires forming a committee of creditors, mainly financial creditors, to make decisions during the insolvency resolution process.
Q5. What is Section 20 of the Companies Act?
Section 20 of the Companies Act, 2013 (India), was removed by the Companies (Amendment) Act, 2015, and is no longer in effect.
